Policy for the Next President: Fair Trade or Free Trade

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U.S. voters worry over whether globalization and free trade are a good deal. Most U.S. presidential candidates say they support free trade, though some candidates argue for caveats such as labor and environmental standards when making new trade deals. And a few candidates have called for greater protections for U.S. workers.

Jonathan Jacoby, associate director of international economic policy at the Center for American Progress and Robert Lane Greene, an international correspondent for the Economist, debate the shape of trade policy for the next U.S. administration and whether new trade deals should come with strings attached.

I like your concept of “integrated” trade policy. I agree that the next president, when signing agreements, should be thinking not only whether an agreement will expand trade, but should take several other things into account. One of these, of course, will be whether it will be good for the American economy overall. He or she should be prepared to offer adjustment assistance for Americans who lose their jobs to trade. (Such losses are usually inevitable, and while it is a hard thing to tell voters, future presidents should be more honest about both the pluses and minuses of trade.)

And yes, I also agree that presidents negotiating deals should make sure that negotiating partners can meet minimum standards. Countries should not only have signed the relevant international instruments, but should be able and willing to meet their terms. This also goes for environmental treaties. As we all know, environmental poisons and climate change know no borders. But executive-branch negotiators do something like that currently; note that we sign deals mainly with middle-and upper-middle-income countries like Peru and South Korea; I do not see America clamoring to sign free-trade deals with the North Koreas of the world.

It is one thing to bear such considerations in mind. It is another to choose the wrong instruments to enforce them. Where “fair trade” gives me the willies is where people think trading partners should be subject to some kind of American monitoring mechanism for labor or environmental standards. The poll you mentioned in your second post— the ones showing other big middle-income countries supporting “minimum standards”—would have very different results if you asked Mexicans or Indians “do you want American congressmen, barely concealing protectionist agendas, lecturing you on your human rights performance every year before certifying your trade status?” I exaggerate slightly. But you can surely imagine, as I can, the incredulous replies: “the country of Guantanamo and Abu Ghraib wants to certify our human rights before buying our products?” Or “the country that destroyed Kyoto is going to certify us on the environment?”

Fortunately, the next president will start with the huge advantage of not being George Bush. A Barack Obama, John McCain or Hillary Clinton would deliver a very different message to the world about human rights or climate change. But when they talk trade, they should look to strengthen multilateral treaties on the environment and labor, where relevant. And they should be prepared to cut agricultural subsidies and open American markets to foreign produce to win countries to that agenda. Listening to others, strengthening international (not American) standards to eliminate truly odious practices like forced labor, and making sacrifices on the American side, is what I would call truly “fair”.

January 31, 2008

Jonathan Jacoby

In your latest submission, Lane, you fairly point out the fact that various factors are putting pressure on American pocketbooks and that globalization is “only partly” to blame for this deep economic insecurity. Indeed, recent research by Robert Lawrence of Harvard University and the Peterson Institute for International Economics concludes that international trade “has played only a minor role in growing income inequality and labor-market displacement in the United States.”

But because this president has hardly acknowledged Americans’ long-simmering economic anxiety—let alone explored its multiple causes—it falls to the next president to explain the nuances of the global economy and champion a 21st-century economic plan that reflects the scale of the challenges and opportunities for the American worker. (The next president could do so through FDR-style fireside chats – perhaps online, so long as there’s a universal broadband strategy in place.)

But until the White House demonstrates such leadership, we cannot dismiss the fact that U.S. trade policy remains a lightning rod for the electorate’s concerns about globalization. Rather than simply declaring a pause in trade liberalization, the next administration should commit to reevaluating how well our entire international economic policy—trade as well as development and monetary policy—is contributing to a virtuous circle of sustained global growth and improved living standards at home and abroad. It should then craft and pursue a new agenda sharply focused on achieving these twin objectives.

What might U.S. trade policy look like as part of such an agenda? Any new bilateral free trade agreement with a middle income country should be considered and perhaps even called an economic integration agreement. Before entering into such negotiations, the United States should conduct an assessment of not only whether an agreement would likely produce a net expansion of trade but also of the quality of the country’s social safety net and its labor, environmental, consumer, or investor laws and institutions in order to strengthen the contribution to broadly rising living standards through expanded trade and investment with the U.S. economy. We should then seek to include within the scope of negotiations major weaknesses in law or institutional capacity—importantly, including the labor enforcement capacity to which you refer—to craft a mutually agreed plan of development assistance that bolsters the country’s efforts to reduce these weaknesses.

By pursuing an integrated approach to activate fully the world economy’s virtuous circle, the next administration will be able to show it has a plan to take the high road and the long view in addressing the challenges of globalization.

January 30, 2008

Robert Lane Greene

Thanks for a thoughtful second posting, Jonathan.

You base much of your argument in this round on public opinion. Sixty percent of Republicans think free trade harms America, over 90 percent of all Americans support “minimum standards”, and so do 80-plus percent of populations in other countries. Several responses offer themselves.

One is that I happen to respectfully disagree. That 60 percent of Republicans think free trade harms America tells me not that free trade is in fact harmful; it tells me that free traders have done a rotten job making our case. (And, I would add, that people like [CNN’s] Lou Dobbs have been worryingly successful with an anti-trade populism that sometimes approaches demagoguery.)

Another quibble would be with the polling questions: asking people if they support “minimum standards” is one rhetorical step away from asking if they support “basic decency.” It’s a value-laden way to form the question. Indeed I’m surprised that 5 percent of Americans are even bigger free traders than I am, professing to support no standards whatsoever. I am, for example, against things like slavery, debt bondage and egregious forms of child labor. But more specifics on what “minimum standards” I might support later on.

You get to the political heart of the matter when you mention that people are nervous because “real wages have stagnated, fringe benefits have been pared, and child care, college tuition and housing costs have risen.” In other words, people are rightly uneasy. But is it right to blame globalization? Only partly. You list three things—college tuition, housing costs and child care, and you could also have said health care—that are non-tradable, and thus are little affected by globalization. Globalization may be a tempting vessel for people’s fears, but it is often the wrong one.

What about stagnant wages? There is no doubt that the streaming hundreds of millions of Chinese and Indian workers from farms to factories affects the global labor market, and hence the American market. So while the American economy has grown, most of that growth has gone to the top, to the kinds of workers who cannot be displaced by a lower-wage Chinese laborer. But let us remember several tremendous benefits that have come from this as well. Global inflation has been kept tame by this new labor, and inflation hits the poorest hardest. Middle- and working-class westerners have access to cheap technology of a capacity that would have been unavailable to Bill Gates ten years ago. And, of course hundreds of millions of people, mostly in Asia, have escaped dire poverty.

I agree with you that our developing-country trading partners should “enforce basic human rights conventions they have already signed.” But we probably disagree on just how that should be enforced.

January 30, 2008

Jonathan Jacoby

Thankfully, our ships have approached one another amicably on these normally rough seas, Lane. But this “CAPtain” accepts the challenge of your mast’s “vivid colors” on several fronts.

Even as most economists praise the theoretical virtues of free trade, Americans are unhappy with this administration’s misguided trade policy in practice. And it’s not just the opposition crying foul. According to a recent front-page story in the Wall Street Journal, six in ten Republicans believe that free trade is bad for the United States.

It is not surprising that many Americans today voice second thoughts about globalization, and particularly its most visible policy feature—trade agreements—when real wages have stagnated, fringe benefits have been pared, and child care, college tuition and housing costs have risen. We urgently need a set of domestic policies to safeguard and improve the health, education, incomes, and wealth of American families, including robust programs to help workers adjust when jobs are threatened or lost.

As for our international economic policy, Americans are looking to the next president for a concrete vision of how to prevent a global race to the bottom and transform it into a race to the top – a vision CAP [Center for American Progress] attempts to inform with our recent Virtuous Circle report.

For starters, over 90 percent of Americans want enforceable labor and environmental standards included in trade agreements – provisions which you dub “restrictions.” With such overwhelming support among Americans, the Republican White House and Democratic Congress would have been foolish not to incorporate them into the U.S.-Peru trade agreement passed last November.

And lest such popular opinion be dismissed as disguised protectionism, majorities in developing and transitional economies now favor including workers rights and environmental provisions in trade agreements, too. Over 80 percent of the population in China, Argentina, Poland, and other nations express such support. Even in Mexico and India, whose governments led the opposition to the consideration of such standards in the 1999 Seattle [World Trade Organization] negotiations, over 65 percent and 55 percent (respectively) of their citizens favor requiring labor and environmental standards within trade accords.

It is hardly asking too much of our developing-country trading partners to enforce basic human rights conventions they have already signed, such as eliminating the worst forms of child labor. And to show true global leadership on the issue, the next U.S. president should offer major capacity building assistance to these nations to implement the International Labor Organization’s Decent Work Agenda of core labor standards, job creation, social protection, and social dialogue.

January 29, 2008

Robert Lane Greene

Upon being invited to this debate, I assumed I’d be arguing for free trade against what is (I think misleadingly) often called “fair trade”. But upon reading your thoughtful entry, Jonathan, I became briefly confused wondering if I was meant to defend “fair trade” instead. This would be a problem. I don’t believe in it, or at least not much. I was confused because you have not yet said much that I disagree with. For the sake of our readers, let me try to nail some vivid colors to the mast and see if I can get you to fire back a bit.

You can tell when you’re walking through the economics department of a university from the dents in the walls, from where economists have banged their heads in frustration trying to make the case for trade. That case is obvious to them, but it is just as “obvious” to many laypeople that buying things from foreigners is bad. Let me then first make the argument for trade, and then perhaps on subsequent exchanges we can look at specific restrictions – regarding the environment, workers’ rights and so forth – that fair-traders would like to put on it.

The case for free trade is straightforward: consumers should be allowed to buy their goods from the cheapest and best supplier. There is no reason, except a blinkered nationalism, that governments should stop them from doing so merely because that supplier happens to be in another country. To do so should be considered an unjustifiable infringement on an individual’s freedom to do with his money what he sees fit.

What really frustrates economists is the debate over trade and national policy is always framed as “exports are good, imports are bad”; the best policy is the one that allows Americans to dump as much of their production on foreigners as possible, while keeping as much of those foreigners’ things out of our country as possible. That is called mercantilism, and it doesn’t work. As you know, healthy exports are only half the equation. Imports provide much of trade’s benefit – which is, indeed, why people import things. If you think buying from China is bad for our economy, ask yourself how many people your company would have to lay off if it had to pay twice as much for every piece of electronic gear in the office—all those computers, fax machines, copiers, telephones—because they were Made In The U.S.A.

Happily, you and I agree that “the United States must lead” and that quality trade policy will both generate global demand and bring “further improvements in our own living standards.” I look forward to hearing where we might disagree.

January 28, 2008

Jonathan Jacoby

Recent economic tremors in the United States are reverberating throughout the global economy. American consumers are buying less as house prices fall, credit-card debt rises, and job growth slows at home. This may hurt export-oriented emerging economies, particularly in Asia. Some Americans may look at this global market unease, as well as increased foreign competition and ownership in our economy, and see a reason to turn inward.

But now more than ever, the United States must lead the international community in a cooperative effort to strengthen and sustain global economic growth while translating that growth more effectively into broad-based increases in living standards and purchasing power around the world. Strategically pursuing these twin goals will generate additional demand for our own products and services among the growing global middle class, thereby fostering further improvements in our own living standards.

The next president should breathe additional life into this virtuous circle of strong, synergistic advances in median living standards at home and abroad by reevaluating the three main elements of our international economic policy — trade, aid, and monetary policy. The new administration should then pledge to refocus these policies, individually and collectively, more sharply on the achievement of these underlying strategic objectives.

Not only does a multi-faceted, coordinated approach to international economic policy provide perhaps our best hope of transcending the polarization and caricature of the current trade policy debate. It also reflects priorities we share with some of our fastest-growing trading partners.

Political leaders in China, India, Brazil, South Africa, and other large middle-income economies face popular pressure to strengthen their safety nets and economic institutions so the gains in national income brought by their integration into the world economy are shared more widely by their own citizens. For example, in China, consumer spending (as a share of the economy) has dropped to 35 percent from 46 percent in 1990, in part because the weakness of its national pension system prompts Chinese workers to save a disproportionate share of their income.

Employing the full toolbox of trade, aid, and monetary policies, the U.S. can offer support and incentives for China and other developing nations to build economic institutions that will bolster living standards, stimulate domestic demand, and quite possibly soften the impact of a U.S. slowdown on the global economy.

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